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Greenspan Is Right: Act Before Social Security Goes Boom

Saving the system promises to be our most contentious policy issue.

February 27, 2004|Paul Hodge | Paul Hodge is director of the Harvard Generations Policy Project and founding editor of the new Harvard Generations Policy Journal. Its inaugural issue can be downloaded at www.genpolicy.com.

Federal Reserve Chairman Alan Greenspan's recommendations to cut baby boomer Social Security benefits is just the opening shot in what will be the most contentious and consuming national public policy battle of the 21st century.

In making his recommendations, Greenspan is seeking to ensure the nation's future financial well-being. The aging of the baby boomers is a demographic tidal wave set to break over the United States. Improvements in healthcare and medical science will extend lives far beyond current official government estimates. America's graying will transform politics, retirement systems, healthcare , welfare systems, labor markets, banking and stock markets. It will force a rethinking of social mores and prejudices, from issues of age and gender discrimination in the job market to end-of-life care.

The first baby boomers will turn 60 in two years and be eligible for entitlements before the term of the next president is over. Between 2011 and 2030, the 65-plus population is projected to soar by 75% to more than 69 million people. Yet the silence from the campaign trail is deafening. Until now, neither the Democrats nor the Republicans have made the aging of baby boomers part of the national presidential election debate.

The magnitude of the coming financial crisis is monumental. Birthrates are declining. The United States is entering a time when fewer workers will be called upon to support the greater numbers of retirees. The tax burden will be economically and politically insupportable. To avoid such a situation, we need to reform the three major federal programs that pay for care of the elderly: Social Security, Medicare and Medicaid.

From 2001 to 2030, if federal revenues as a percentage of gross domestic product remain roughly steady, Social Security, Medicare and Medicaid's share of GDP would need to nearly double. Without a tax increase, programs for the elderly will take up two-thirds of federal revenues. That would force non-elderly programs -- including such essential expenditures as defense, agriculture, law enforcement and interest on the national debt -- to shrink by more than half. If the increased cost of those programs is to be paid for with tax hikes, the Social Security/Medicare tax would have to increase to 30% from 15.3%.

Though they are politically difficult, there are solutions that can help us face these challenges. Moving back the age of retirement under Social Security, as Greenspan has recommended, is reasonable; life expectancy has risen from 63 to 79.6 since 1935, but, before long, the retirement age will have risen by only two years, to 67. Also, benefits can be cut for the wealthiest elderly, who currently gain benefits regardless of their net worth or whether their retirement incomes are $100,000 or $49,000.

The burden of a failed system will fall most heavily on those least able to pick up the financial slack: on the poor, on women and on minorities. This becomes strikingly clear when looking at the perilous future for baby boomer women. Unless there is a dramatic policy shift, a great number of boomer women, and particularly minority women, will fall below the poverty line.

Women typically work for fewer years than men and, when they're working, earn less than men do, making their pension incomes lower. They outlive their spouses and their spouses' pension and Social Security benefits. We need national policies now to encourage saving and investment by boomer women. Women should take the lead on reforms of the Social Security system.

History will judge American humanity and compassion by how we resolve our intergenerational challenges. Americans and their leaders must face the facts and stop underestimating the lead time required to create and implement policies to address boomer aging. We must find our political courage and end our denial.

If we commit now to the challenge Greenspan made clear, we can find solutions -- and a way to provide for the well-being of our aging citizens, our children and our grandchildren.

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